It seems you can't open a web browser these days without being bombarded by news heralding the arrival of the JOBS Act. The motivation behind the legislation was to give small businesses easier access to capital raising, which would in turn allow them to expand their operations, make hires and support the economy.
A small component of the law extended these benefits to hedge funds and private equity firms, however, which has since led to a snowball of media coverage that has been debating the pros and cons of this law.
The good news is that for the most part, marketing professionals at mutual fund companies don't need to be too concerned with this. Yes, retail investors will now hear about, and possibly hear from, these types of funds, but the JOBS Act mandates that only accredited investors can invest in these products. So for now, the majority of retail mutual fund investors and retirement clients will be spared.
Problem solved, right? Not so fast...
You see, being the sophisticated group they are, hedge funds still pose a credible threat to the fund industry, but it has nothing to do with the JOBS Act. So what's the threat?
One of the biggest trends in the asset management space over the last several years has been the growing interest in liquid alternative investment products. Retail investors, licking their wounds from the 2008 market collapse, started seeking products which offered them the non-correlated returns of hedge funds, with the benefits and protection of a traditional '40 Act fund (transparency, liquidity, oversight, etc.).
Looking to meet this demand, while at the same time tapping a new source of investors and assets, hedge funds began launching alternative mutual funds (liquid alternatives) that mirrored their hedge fund strategies. Despite the fact that these types of "alternative" mutual funds already existed, and most of these new funds had minimum investment levels far above those charged by traditional mutual funds, these new products were in the right place at the right time, and hedge funds raised billions in retail assets that normally would have stayed with traditional fund families.
Mutual funds, sensing the threat and not willing to sit on the sideline, followed suit and started launching their own alternative liquid products, and some fund firms even acquired hedge fund shops to fast track this initiative.
Fast forward five years and the appetite for liquid alternative products is still going strong. According to Morningstar, assets invested in these funds stood at $90.3 billion as of Dec. 31, 2012, a 140% increase over the previous five years. And total net liquid alternative assets rose by almost 20% through the first five months of this year.
So what should mutual fund executives be doing to "keep the castle from being stormed?"
* Forewarned Is Forearmed: Reach out to the financial advisors who sell your funds, initiate a conversation on this and explain they might get questions from end-clients about investing in these type of retail hedge funds. Since not all advisors are familiar with these products, take the time to teach them what they are and which type of investors may (or may not) be best suited to invest in them. These funds vary in several critical areas, from portfolio construction to investment objectives, so take advantage of this moment to educate advisors and answer their questions. This is an opportunity to get in front of the discussion.
* Your Secret Weapon: Remember, the advisors who sell your products are an extension of your marketing team and they are your brand ambassadors. By giving them all of the necessary information on this issue, they'll in turn be able to professionally and intelligently answer their clients' questions, which will build goodwill and help strengthen your relationship within the advisor community.
* Flex Your Marketing Muscle: One area in which traditional fund shops have an undisputed advantage over hedge funds is marketing. Mutual fund firms are among the most marketed brands in the country, with many firms having decades of experience communicating with investors, promoting their products and building strong brand loyalty. Hedge funds simply can't match this, so take advantage of it. Investors rely on trust and brand recognition, which mutual fund companies have in spades.
* Distribution: Just as fund companies have a leg-up on the marketing end, the same holds true for distribution. So take advantage of your firm's distribution infrastructure and push out your own alternative mutual funds. Alts are one of the fastest growing asset classes and can represent a significant growth area.
* Cost Is King: While liquid alternatives are decidedly less expensive to invest in than their "big brother" hedge funds, which traditionally have a 2 and 20 fee structure, they tend to be much more expensive than traditional mutual funds. According to the Investment Company Institute, investors in long-term mutual funds paid an average of 77 basis points in 2012, down from 79 basis points the year prior. By comparison, liquid alternatives can charge as much as 200 basis points.
* Stay Alert: While hedge fund-launched '40 Act funds might not pose the same threat to the mutual fund industry as ETFs did, they're still a formidable threat to be aware of. So stay alert on this asset class and monitor changes in investor and advisor sentiment.